INVESTMENT SECURITIES

The main objectives of our investment strategy are to provide a source of liquidity while managing our interest rate risk, and to generate an adequate level of interest income without taking undue risks. Our investment policy permits investments in various types of securities, certificates of deposits and federal funds sold in compliance with various restrictions in the policy. As of March 31, 2016 and December 31, 2015, all investment securities were classified as available-for-sale.

Our available-for-sale securities totaled $78.9 million and $79.9 million as of March 31, 2016 and December 31, 2015, respectively. Securities with a fair value of $1.1 million were pledged to the Federal Reserve Bank of Richmond (“FRB”) and an additional $2.8 million and $18.5 million in investments were pledged to public housing authorities in North Carolina and the North Carolina Department of State Treasurer as collateral for public deposits at March 31, 2016. Securities with a fair value of $0.8 million were pledged to the FRB and an additional $2.9 million and $19.6 million in investments were pledged to public housing authorities in North Carolina and the North Carolina Department of State Treasurer as collateral for public deposits at December 31, 2015. Our investment portfolio consists of the following securities:

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U.S. government agency securities (“U.S. Agencies”) ,

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U.S. government sponsored residential mortgage backed securities (“MBS”), and

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Municipal securities (“Municipals”).

The amortized cost, gross unrealized gains and losses and fair values of investment securities at March 31, 2016 and December 31, 2015 were:

(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
(Unaudited)
March 31, 2016
U.S. Agencies	$	22,289	$	51	$	(2	)	$	22,338
MBS
Residential		47,315		246		(277	)		47,284
Municipals		9,056		222		(12	)		9,266
Total	$	78,660	$	519	$	(291	)	$	78,888

December 31, 2015
U.S. Agencies	$	30,681	$	2	$	(250	)	$	30,433
MBS
Residential		41,323		20		(409	)		40,934
Municipals
North Carolina		8,489		98		(13	)		8,574
Total	$	80,493	$	120	$	(672	)	$	79,941

During the three months ended March 31, 2016 and 2015, there were $36 thousand and $112 thousand gross realized gains and $30 thousand and $83 thousand gross realized losses on sales or calls of securities, respectively.

The amortized cost and estimated market values of securities as of March 31, 2016 and December 31, 2015 by contractual maturities are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. MBS, which are not due at a single maturity date, are grouped based upon the final payment date. MBS may mature prior to the applicable final payment date because of principal prepayments.


(Dollars in thousands)	As of March 31, 2016
(Unaudited)	Fair Value		Amortized Cost
U.S. Agencies
Due after one year through five years	$	16,324	$	16,289
Due after five years through ten years		6,014		6,000
Total U.S. Agencies	$	22,338	$	22,289

MBS
Residential
Due within one year	$	5,312	$	5,320
Due after one year through five years		16,214		16,213
Due after five years through ten years		13,572		13,554
Due after ten years		12,186		12,228
Total MBS	$	47,284	$	47,315

Municipals
Due within one year	$	261	$	260
Due after one year through five years		1,313		1,318
Due after five years through ten years		7,283		7,078
Due after ten years		409		400
Total Municipals	$	9,266	$	9,056

(Dollars in thousands)	As of December 31, 2015
	Fair Value		Amortized Cost
U.S. Agencies
Due within one year	$	3,481	$	3,500
Due after one year through five years		21,998		22,181
Due after five years through ten years		4,954		5,000
Total U.S. Agencies	$	30,433	$	30,681

MBS
Residential
Due within one year	$	5,750	$	5,812
Due after one year through five years		15,526		15,672
Due after five years through ten years		11,387		11,480
Due after ten years		8,271		8,359
Total MBS	$	40,934	$	41,323

Municipals
Due within one year	$	262	$	260
Due after one year through five years		738		738
Due after five years through ten years		7,169		7,091
Due after ten years		405		400
Total Municipals	$	8,574	$	8,489

All securities owned as of March 31, 2016 and December 31, 2015 are investment grade. The unrealized losses were attributable to changes in market interest rates. The Company evaluates securities for other than temporary impairment on a quarterly basis. Consideration is given to the financial condition and near-term prospects of the issuer, the length of time and extent to which the fair value has been less than cost, and our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Based on these evaluations, the Company did not deem any securities to be other-than-temporarily impaired as of March 31, 2016 or December 31, 2015.

As of March 31, 2016 and December 31, 2015, the Company held 39 and 71 investment positions, respectively, with unrealized losses of $291 thousand and $672 thousand, respectively. These investments were in U.S. Agencies, MBS and Municipals. In analyzing an issuer's financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts' reports. Management had determined that all declines in market values of available-for-sale securities are not other-than-temporary, and the Company will not likely be required to sell these securities.

As of March 31, 2016 and December 31, 2015, the fair value of securities with gross unrealized losses by length of time that the individual securities have been in an unrealized loss position was as follows:

(Dollars in thousands)	Less Than 12 Months					12 Months or Greater					Total
(Unaudited)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
March 31, 2016
U.S. Agencies	$	994	$	(2	)	$	—	$	—		$	994	$	(2	)
MBS
Residential		10,362		(58	)		9,195		(219	)		19,557		(277	)
Municipals		1,406		(12	)		—		—			1,406		(12	)
Total	$	12,762	$	(72	)	$	9,195	$	(219	)	$	21,957	$	(291	)

(Dollars in thousands)	Less Than 12 Months					12 Months or Greater					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
December 31, 2015
U.S. Agencies	$	27,060	$	(237	)	$	987	$	(13	)	$	28,047	$	(250	)
MBS
Residential		24,369		(193	)		9,970		(216	)		34,339		(409	)
Municipals		1,405		(13	)		—		—			1,405		(13	)
Total	$	52,834	$	(443	)	$	10,957	$	(229	)	$	63,791	$	(672	)